Strategic Outsourcing

Two new strategic approaches, when properly combined, allow managers to leverage their companies’ skills and resources well beyond levels available with other strategies:

  • Concentrate the firm’s own resources on a set of “core competencies” where it can achieve definable preeminence and provide unique value for customers.1
  • Strategically outsource other activities — including many traditionally considered integral to any company — for which the firm has neither a critical strategic need nor special capabilities.2

The benefits of successfully combining the two approaches are significant. Managers leverage their company’s resources in four ways. First, they maximize returns on internal resources by concentrating investments and energies on what the enterprise does best. Second, well-developed core competencies provide formidable barriers against present and future competitors that seek to expand into the company’s areas of interest, thus facilitating and protecting the strategic advantages of market share. Third, perhaps the greatest leverage of all is the full utilization of external suppliers’ investments, innovations, and specialized professional capabilities that would be prohibitively expensive or even impossible to duplicate internally. Fourth, in rapidly changing marketplaces and technological situations, this joint strategy decreases risks, shortens cycle times, lowers investments, and creates better responsiveness to customer needs.

Two examples from our studies of Australian and U.S. companies illustrate our point:

  • Nike, Inc., is the largest supplier of athletic shoes in the world. Yet it outsources 100 percent of its shoe production and manufactures only key technical components of its “Nike Air” system. Athletic footwear is technology- and fashion-intensive, requiring high flexibility at both the production and marketing levels. Nike creates maximum value by concentrating on preproduction (research and development) and postproduction activities (marketing, distribution, and sales) linked together by perhaps the best marketing information system in the industry. Using a carefully developed, on-site “expatriate” program to coordinate its foreign-based suppliers, Nike even outsourced the advertising component of its marketing program to Wieden & Kennedy, whose creative efforts drove Nike to the top of the product recognition scale. Nike grew at a compounded 20 percent growth rate and earned a 31 percent ROE for its shareholders through most of the past decade.
  • Knowing it could not be the best at making chips, boxes, monitors, cables, keyboards, and so on for its explosively successful Apple II, Apple Computer outsourced 70 percent of its manufacturing costs and components.

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References

1. J.B. Quinn, T.L. Doorley, and P.C. Paquette, “Technology in Services: Rethinking Strategic Focus,” Sloan Management Review, Winter 1990, pp. 79–87.

2. J.B. Quinn, “Leveraging Knowledge and Service Based Strategies through Outsourcing,” in Intelligent Enterprise (New York: Free Press, 1992), pp. 71–97.

3. M. Moritz, The Little Kingdom: The Private Story of Apple Computer (New York: Morrow, 1984); and

W. Davidson, “Apple Computer, Inc.” (Charlottesville, Virginia: University of Virginia, Darden Research Foundation, Case UVA-BP219, 1984).

4. R. Coase, “The Nature of the Firm,” Economica, November 1937, pp. 386–405; and

O. Williamson, Markets and Hierarchies, Analysis and Antitrust Implications (New York: Free Press, 1975).

5. R. Rumelt, Strategy, Structure and Economic Performance (Cambridge, Massachusetts: Harvard University Press, 1974).

6. R. D’Aveni and A. Illinich, “Complex Patterns of Vertical Integration in the Forest Products Industry,” Academy of Management Journal 35 (1992): 596–625;

P.Y. Batteyri, “The Concept of Impartition Policies: A Different Approach to Vertical Integration Strategies,” Strategic Management Journal 9 (1988): 507–520.

7. G.J. Maloney, “The Choice of Organizational Form . . . ,” Strategic Management Journal 13 (1992): 559–584;

R. Miles and C. Snow, “Organizations, New Concepts and New Forms,” California Management Review, Spring 1986, pp. 62–73.

8. Rumelt (1974).

9. W. Davidson, The Amazing Race, Winning the Technorivalry with Japan (New York: John Wiley, 1983).

10. C. Prahalad and G. Hamel, “The Core Competence of the Corporation,” Harvard Business Review, May–June 1990, pp. 79–91.

11. J.B. Quinn, T.L. Doorley, and P.C. Paquette, “Beyond Products: Service-Based Strategies,” Harvard Business Review, March–April 1990, pp. 58–68.

12. D. Turner and M. Crawford, “Managing Current and Future Competitive Performance: The Role of Competence” (Kensington, Australia, University of New South Wales, Australian Graduate School of Management, Center for Corporate Change, 1992).

13. H. Mintzberg and J.B. Quinn, “Honda Motor Co.,” The Strategy Process (Englewood Cliffs, New Jersey: Prentice Hall, 1993), pp. 140–155.

14. R. D’Aveni and D. Ravenscraft, “Economies of Integration vs. Bureaucracy Costs: Does Vertical Integration Improve Performance?” Academy of Management Journal, forthcoming; and

H. Mintzberg, The Nature of Managerial Work (New York: Harper & Row, 1973).

15. J. Stuckey and D. White, “When and When Not to Vertically Integrate,” Sloan Management Review, Spring 1993, pp. 71–83.

16 “The Incredible Shrinking Company,” The Economist, 15 December 1990, pp. 65–66; and

“Costing the Factory of the Future,” The Economist, 3 March 1990, pp. 61–62.

17. Interview with J.B. Quinn, March 1992.

18. “Manufacturing: The Ins and Outs of Outing,” The Economist, 31 August 1991, pp. 54 and 56.

19. M.F. Blaxill and T.M. Hout, “The Fallacy of the Overhead Quick Fix,” Harvard Business Review, July–August 1991, pp. 93–101.

20. R. Reich, “Who Is Us?,” Harvard Business Review, January–February 1990, pp. 53–64.

21. E. von Hippel, The Sources of Innovation (New York: Oxford University Press, 1988).

Acknowledgments

We gratefully acknowledge the research support of McKinsey & Company; NovaCare, Inc.; Marsh & McLennan; William M. Mercer Companies; Arthur Andersen & Co.; and American Express on various aspects of this project.